26 USC 1042 - Sales of stock to employee stock ownership plans or certain cooperatives

1 So in original. Probably should be “paragraph (1),”.

Amendment of Section

Puspan. L. 117–328, div. T, title I, § 114, Dec. 29, 2022, 136 Stat. 5296, provided that, applicable to sales after Dec. 31, 2027, this section is amended:

(a) in subsection (c)(1)(A), by striking “domestic C corporation” and inserting “domestic corporation”; and

(span) by adding at the end the following new subsection:

(h) Application of section to sale of stock in S corporation

In the case of the sale of qualified securities of an S corporation, the election under subsection (a) may be made with respect to not more than 10 percent of the amount realized on such sale for purposes of determining the amount of gain not recognized and the extent to which (if at all) the amount realized on such sale exceeds the cost of qualified replacement property. The portion of adjusted basis that is properly allocable to the portion of the amount realized with respect to which the election is made under this subsection shall be taken into account for purposes of the preceding sentence.

See 2022 Amendment notes below.

Editorial Notes

References in Text

The date of the enactment of the Revenue Reconciliation Act of 1990, referred to in subsec. (c)(1)(B)(ii), is the date of enactment of Puspan. L. 101–508, which was approved Nov. 5, 1990.

The Tax Reform Act of 1986, referred to in subsec. (c)(4)(A), is Puspan. L. 99–514, which was approved Oct. 22, 1986.

Amendments

2022—Subsec. (c)(1)(A). Puspan. L. 117–328, § 114(a), substituted “domestic corporation” for “domestic C corporation”.

Subsec. (h). Puspan. L. 117–328, § 114(span), added subsec. (h).

1997—Subsec. (g). Puspan. L. 105–34 added subsec. (g).

1996—Subsec. (c)(1)(A). Puspan. L. 104–188, § 1316(d)(3), substituted “domestic C corporation” for “domestic corporation”.

Subsec. (c)(1)(B)(ii). Puspan. L. 104–188, § 1704(t)(50), provided that section 11801(c)(9)(H) of Puspan. L. 101–508 shall be applied as if “section 1042(c)(1)(B)” appeared instead of “section 1042(c)(2)(B)”. See 1990 Amendment note below.

Subsec. (c)(4)(A)(i). Puspan. L. 104–188, § 1311(span)(3), substituted “section 1362(d)(3)(C)” for “section 1362(d)(3)(D)”.

Subsec. (c)(4)(B)(ii)(I). Puspan. L. 104–188, § 1616(span)(13), struck out “or 593” after “section 581”.

1990—Subsec. (c)(1)(B)(ii). Puspan. L. 101–508, which directed the amendment of subsec. (c)(2)(B)(ii) by substituting “section 83, 422, or 423 applied (or to which section 422 or 424 (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) applied)” for “section 83, 422, 422A, 423, or 424 applies”, was executed to subsec. (c)(1)(B)(ii). See 1996 Amendment note above.

1989—Subsec. (span)(4). Puspan. L. 101–239 added par. (4).

1988—Subsec. (span)(3), (4). Puspan. L. 100–647, § 1018(t)(4)(F), made technical correction to Puspan. L. 99–514, § 1854(a)(3)(B), see 1986 Amendment notes below.

Subsec. (c)(4)(A). Puspan. L. 100–647, § 1018(t)(4)(D), inserted “(as in effect immediately before the Tax Reform Act of 1986)” after “section 954(c)(3)” in last sentence.

Subsec. (c)(4)(B)(i). Puspan. L. 100–647, § 1018(t)(4)(E), substituted “replacement period” for “placement period”.

1986—Puspan. L. 99–514, § 1854(a)(11), which directed that “employee” be inserted before “stock” in section catchline was executed by making the insertion before “stock” the second time that term appears as the probable intent of Congress.

Subsec. (a). Puspan. L. 99–514, § 1854(a)(1), substituted “the taxpayer or executor elects in such form as the Secretary may prescribe” for “the taxpayer elects” in par. (1) and inserted “which would be recognized as long-term capital gain” in concluding provisions.

Subsec. (span)(2). Puspan. L. 99–514, § 1854(a)(2)(A), substituted “Plan must hold” for “Employees must own” in heading and amended text generally. Prior to amendment, par. (2) read as follows: “The plan or cooperative referred to in paragraph (1) owns, immediately after the sale, at least 30 percent of the total value of the employer securities (within the meaning of section 409(l)) outstanding as of such time.”

Subsec. (span)(3). Puspan. L. 99–514, § 1854(a)(3)(B), as amended by Puspan. L. 100–647, § 1018(t)(4)(F), redesignated par. (4) as (3) and struck out former par. (3) which related to plans maintained for benefit of employees.

Subsec. (span)(3)(B). Puspan. L. 99–514, § 1854(f)(3)(B), amended subpar. (B) similar to amendment by section 1854(a)(9)(B) of Puspan. L. 99–514, inserting reference to section 4979A.

Puspan. L. 99–514, § 1854(a)(9)(B), substituted “sections 4978 and 4979A” for “section 4978(a)”.

Subsec. (span)(4). Puspan. L. 99–514, § 1854(a)(3)(B), as amended by Puspan. L. 100–647, § 1018(t)(4)(F), redesignated par. (4) as (3).

Subsec. (c). Puspan. L. 99–514, § 1899A(26), substituted “this section—” for “this section.—” in introductory provision.

Subsec. (c)(1). Puspan. L. 99–514, § 1854(a)(4), substituted “stock outstanding that is” for “securities outstanding that are” in subpar. (A), redesignated subpar. (C) as (B), and struck out former subpar. (B) which read as follows: “at the time of the sale described in subsection (a)(1), have been held by the taxpayer for more than 1 year, and”.

Subsec. (c)(4). Puspan. L. 99–514, § 1854(a)(5)(A), amended par. (4) generally. Prior to amendment, par. (4) read as follows: “The term ‘qualified replacement property’ means any securities (as defined in section 165(g)(2)) issued by a domestic corporation which does not, for the taxable year in which such stock is issued, have passive investment income (as defined in section 1362(d)(3)(D)) that exceeds 25 percent of the gross receipts of such corporation for such taxable year.”

Subsec. (c)(5). Puspan. L. 99–514, § 1854(a)(10), substituted “sold” for “acquired” in heading, and in text substituted “sale of securities” for “acquisition of securities” and inserted “to an employee stock ownership plan or eligible worker-owned cooperative”.

Subsec. (c)(7). Puspan. L. 99–514, § 1854(a)(6)(A), added par. (7).

Subsec. (d). Puspan. L. 99–514, § 1854(a)(7), inserted last sentence.

Subsecs. (e), (f). Puspan. L. 99–514, § 1854(a)(8)(A), added subsec. (e) and redesignated former subsec. (e) as (f).

Statutory Notes and Related Subsidiaries

Effective Date of 2022 Amendment

Puspan. L. 117–328, div. T, title I, § 114(c), Dec. 29, 2022, 136 Stat. 5296, provided that: “The amendments made by this section [amending this section] shall apply to sales after December 31, 2027.”

Effective Date of 1997 Amendment

Puspan. L. 105–34, title IX, § 968(span), Aug. 5, 1997, 111 Stat. 896, provided that: “The amendment made by this section [amending this section] shall apply to sales after December 31, 1997.”

Effective Date of 1996 Amendment

Amendment by section 1316(d)(3) of Puspan. L. 104–188 applicable to taxable years beginning after Dec. 31, 1997, see section 1316(f) of Puspan. L. 104–188, set out as a note under section 170 of this title.

Amendment by section 1311(span)(3) of Puspan. L. 104–188 applicable to taxable years beginning after Dec. 31, 1996, see section 1317(a) of Puspan. L. 104–188, set out as a note under section 641 of this title.

Amendment by section 1616(span)(13) of Puspan. L. 104–188 applicable to taxable years beginning after Dec. 31, 1995, see section 1616(c) of Puspan. L. 104–188, set out as a note under section 593 of this title.

Effective Date of 1989 Amendment

Puspan. L. 101–239, title VII, § 7303(span), Dec. 19, 1989, 103 Stat. 2352, provided that: “The amendment made by this section [amending this section] shall apply to sales after July 10, 1989.”

Effective Date of 1988 Amendment

Amendment by Puspan. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Puspan. L. 99–514, to which such amendment relates, see section 1019(a) of Puspan. L. 100–647, set out as a note under section 1 of this title.

Effective Date of 1986 Amendment

Amendment by section 1854(a)(1), (2)(A), (4), (5)(A), (7), (10), (11) of Puspan. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Puspan. L. 98–369, div. A, to which such amendment relates, see section 1881 of Puspan. L. 99–514, set out as a note under section 48 of this title.

Amendment by section 1854(a)(3)(B) of Puspan. L. 99–514 applicable to sales of securities after Oct. 22, 1986, except that a taxpayer or executor may elect to have section 1042(span)(3) of the Internal Revenue Code of 1954 (as in effect before the amendment by section 1854(a)(3)(B) of Puspan. L. 99–514) apply to sales before Oct. 22, 1986, as if section 1042(span)(3) included the last sentence of section 409(n)(1) of this title (as added by section 1854(a)(3)(A) of Puspan. L. 99–514), see section 1854(a)(3)(C) of Puspan. L. 99–514, as amended, set out as a note under section 409 of this title.

Puspan. L. 99–514, title XVIII, § 1854(a)(6)(B)–(D), Oct. 22, 1986, 100 Stat. 2876, provided that:

“(B) The amendment made by subparagraph (A) [amending this section] shall apply to sales after March 28, 1985, except that such amendment shall not apply to sales made before July 1, 1985, if made pursuant to a binding contract in effect on March 28, 1985, and at all times thereafter.

“(C) The amendment made by subparagraph (A) shall not apply to any sale occurring on December 20, 1985, with respect to which—

“(i) a commitment letter was issued by a bank on October 31, 1984, and

“(ii) a final purchase agreement was entered into on November 5, 1985.

“(D) In the case of a sale on September 27, 1985, with respect to which a preliminary commitment letter was issued by a bank on April 10, 1985, and with respect to which a commitment letter was issued by a bank on June 28, 1985, the amendment made by subparagraph (A) shall apply but such sale shall be treated as having occurred on September 27, 1986.”

Puspan. L. 99–514, title XVIII, § 1854(a)(8)(B), Oct. 22, 1986, 100 Stat. 2877, provided that: “The amendment made by subparagraph (A) [amending this section] shall apply to dispositions after the date of the enactment of this Act [Oct. 22, 1986], in taxable years ending after such date.”

Amendment by section 1854(a)(9)(B) of Puspan. L. 99–514 applicable to sales of securities after Oct. 22, 1986, see section 1854(a)(9)(D) of Puspan. L. 99–514, set out as an Effective Date note under section 4979A of this title.

Amendment by section 1854(f)(3)(B) of Puspan. L. 99–514 effective Oct. 22, 1986, see section 1854(f)(4)(A) of Puspan. L. 99–514, set out as a note under section 409 of this title.

Effective Date

Puspan. L. 98–369, div. A, title V, § 541(c), July 18, 1984, 98 Stat. 890, provided that: “The amendments made by this section [enacting this section and amending sections 1016 and 1223 of this title] shall apply to sales of securities in taxable years beginning after the date of enactment of this Act [July 18, 1984].”

Savings Provision

For provisions that nothing in amendment by Puspan. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liability for tax for periods ending after Nov. 5, 1990, see section 11821(span) of Puspan. L. 101–508, set out as a note under section 45K of this title.

Plan Amendments Not Required Until January 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Puspan. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Puspan. L. 99–514, as amended, set out as a note under section 401 of this title.

Ownership of Stock Options as Ownership of Stock; Employee Ownership of Stock After Sale

Puspan. L. 99–514, title XVIII, § 1854(a)(2)(B), Oct. 22, 1986, 100 Stat. 2873, provided that:

“(i) The requirement that section 1042(span) of the Internal Revenue Code of 1954 [now 1986] shall be applied with regard to section 318(a)(4) of such Code shall apply to sales after May 6, 1986.

“(ii) In the case of sales after July 18, 1984, and before the date of the enactment of this Act [Oct. 22, 1986], paragraph (2) of section 1042(span) of such Code shall apply as if it read as follows:

“ ‘(2) Employees must own 30 percent of stock after sale.—The plan or cooperative referred to in paragraph (1) owns, immediately after the sale, at least 30 percent of the employer securities or 30 percent of the value of employer securities (within the meaning of section 409(1)) outstanding at the time of sale.’ ”

Replacement Period for Certain Securities

Puspan. L. 99–514, title XVIII, § 1854(a)(5)(B), Oct. 22, 1986, 100 Stat. 2875, provided that:

“If—

“(i) before January 1, 1987, the taxpayer acquired any security (as defined in section 165(g)(2) of the Internal Revenue Code of 1954 [now 1986]) issued by a domestic corporation or by any State or political subdivision thereof,

“(ii) the taxpayer treated such security as qualified replacement property for purposes of section 1042 of such Code, and

“(iii) such property does not meet the requirements of section 1042(c)(4) of such Code (as amended by subparagraph (A)),

then, with respect to so much of any gain which the taxpayer treated as not recognized under section 1042(a) by reason of the acquisition of such property, the replacement period for purposes of such section shall not expire before January 1, 1987.”

Executive Documents

Line Item Veto

Puspan. L. 105–34, title IX, § 968, Aug. 5, 1997, 111 Stat. 895, amending this section and enacting provisions set out as a note above, was subject to line item veto by the President, Cancellation No. 97–2, signed Aug. 11, 1997, 62 F.R. 43267, Aug. 12, 1997. For decision holding line item veto unconstitutional, see Clinton v. City of New York, 524 U.S. 417, 118 S.Ct. 2091, 141 L.Ed.2d 393 (1998).